Chapter 10 (LC/HW)

The equilibrium quantity depends on the forces of supply and demand. Which part of the graph represents the equilibrium quantity?

A (MG private cost = MG social benefit)

When private bargaining is allowed to include bystanders, _____ because _____.

Better outcomes are possible; externalities are considered

Which part of the graph represents the socially optimal quantity when there are negative externalities?

C (MG social cost = MG social benefit)

The result that, under certain circumstances, no government action is needed to control an externality because it can be eliminated by bargaining between the affected parties is called:

Coase Theorem.

What is a market failure?

It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost.

Which statement does NOT explain why positive externalities lead to market failure?

Positive externalities create side effects that are beneficial to other people.

Which is NOT true about the government intervention of using corrective taxes or subsidies and cap-and-trade systems?

They are worse than using regulations or government provision.

Which example does NOT involve private bargaining to internalize an externality? merge is a type of private bargain

To reduce maintenance costs, an electric company replaces overhead wires with underground wires capable of carrying the same load.

Construction is to resume on a house down the street which causes noise. This is a _____.

a negative externality

The owners of Jamal's Diner have lobbied their city council for lower business taxes on small businesses. The ordinance was finally passed, and several other businesses, including SuperSudz Car Wash a few blocks away, also saw their city tax burden lowered. The owners of Jamal's Diner were participants in the action and received a _____ from the tax cuts. The owners of SuperSudz Car Wash were not participants in the lobbying effort and received a _____ from the tax cuts.

benefit; positive externality

The forces of demand and supply often yield the best possible outcome for society. However, when externalities are involved, _____ must be accounted for as well as _____.

bystanders; buyers and sellers

Because free-riders do not pay for the benefits they consume, they are _____ and experience a _____ externality.

bystanders; positive

All of these options are able to solve negative externality problems EXCEPT: Included: - Lawsuits - Corrective taxes - Fines

corrective subsidies.

Private bargaining involves all of these options EXCEPT: Included: - Side payment - Strategic investments - Mergers

corrective subsidies.

A corrective tax can induce people to consider the external _____ of the _____ externalities they create.

cost; negative

The Coase Theorem states that externality problems can be solved by private bargaining if it is _____ and can _____.

costless; be legally enforced

According to the Coase Theorem, Private bargaining can lead to an _____ outcome _____ the need for new government intervention.

efficient; without

Suppose two neighbors share a park, one neighbor, Cindy, leaves trash in the park. This bothers the other neighbor, Madison. According to the Coase Theorem, one necessary condition to alleviate the externality is that:

either Cindy or Madison owns the park.

Positive externalities create the _____ problem when people cannot be excluded from using something.

free-rider

The externality issue that arises when someone can enjoy the benefits of a good or service without paying for it is known as the _____.

free-rider problem

When you exercise regularly, you create positive externalities because:

it does not only benefit you but also your health insurer.

When _____ are involved in bargaining, finding a solution that removes externalities is more difficult.

more parties

In economics, the term "free rider" refers to:

one who waits for others to produce a good and then enjoys its benefits without paying for it.

Any solution to the externality problem involves getting _____ to consider _____ effects.

participants; external

Negative externalities create problems because:

people fail to account for their actions that impose costs on others.

Goods that have _____ externalities could run the risk of being over-consumed by _____.

positive; bystanders

Solutions to negative externalities should be addressed by _____, instead of _____, whenever possible.

private bargaining; government intervention

Common resources have _____ gains and _____ costs.

private; shared